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Saturday, February 22, 2020  Spokane, Washington  Est. May 19, 1883
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Motley Fool: Decades of dividends

An advertisement for Pepsi is shown downtown Atlanta prior to the Super Bowl in February 2019. (Associated Press)
An advertisement for Pepsi is shown downtown Atlanta prior to the Super Bowl in February 2019. (Associated Press)

If you’re looking for a growing, dividend-paying investment, consider shares of PepsiCo (Nasdaq: PEP) – a beverage and snack giant that can perform well in good and bad economic environments. Its offerings are available in more than 200 countries and territories, and its brands include big names such as Pepsi, Lays, Mountain Dew, Doritos, Gatorade, Tropicana, Quaker Oats, Aquafina, Cheetos, Tostitos and Fritos, along with SodaStream, Near East, Naked, Smartfood, Life and Sabra. A whopping 22 of its brands generate more than $1 billion in sales each year.

PepsiCo has evolved by launching lower-calorie and sugarless sodas; non-carbonated beverages such as water, juice and tea; and healthier versions of Frito-Lay and Quaker products. Its scale and distribution advantages mean it can supply products around the globe more efficiently than most of its rivals, and its offerings tend to get preferential placement in shops and grocery stores.

With a forward-looking price-to-earnings, or P/E, ratio recently near 23, PepsiCo’s stock isn’t exactly cheap, but it’s not outrageously overpriced either. The stock offers a dividend that recently yielded 2.8%, too. Even better, that payout has been rising over time, at an average annual rate of 7.9% over the past five years. And that’s a rather reliable dividend, as PepsiCo has paid it quarterly since 1965, upping the dividend annually for 47 years.

Ask the Fool

Q: How and why do companies decide to pay dividends? – H.T., Gainesville, Florida

A: If a company’s management expects reliable cash generation in the years to come, it may decide to reward shareholders by paying a cash dividend – and it won’t want to stop doing so, as that would suggest trouble. That dividend will likely be a portion, but not all, of earnings, and will typically be a fixed sum paid each quarter. Healthy and growing companies tend to increase their payouts over time, often once a year.

Aside from paying dividends, companies may also deploy earnings to pay down debt, buy another company, build more factories, hire more workers, buy more advertising and so on. Young or quickly growing companies often don’t pay dividends, but instead reinvest all that money into growth.

To see a list of promising stocks we’ve recommended, many of which pay dividends, check out our Motley Fool Stock Adviser service (at Fool.com/services).

Q: What subjects should I master to become a good investor? – P.L., Charleston, South Carolina

A: Gaining a solid understanding of financial accounting will allow you to make sense of companies’ financial statements and spot red flags such as shrinking profit margins or rising debt.

Books such as “How to Read a Financial Report” by John Tracy and Tage Tracy (Wiley, $23) or “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson (Weiser, $20) can help. Peter Lynch’s “One Up on Wall Street” (Simon & Schuster, $18) and Philip Fisher’s “Common Stocks and Uncommon Profits and Other Writings” (Wiley, $25) cover investing well.

Simply reading broadly – about psychology, science, history, business and more – can also make you a savvier investor.

My smartest investment

My smartest investment has been putting money into an S&P 500 index fund. It has outperformed my other mutual funds and my individual stocks. Warren Buffett is right. (But it’s less fun!) – B.T., online

The Fool responds: If you don’t have the time, interest or skill to study stocks and carefully select which ones to buy, you can instead choose to invest in a low-fee, broad-market index fund such as one based on the S&P 500 (an index of 500 of America’s biggest companies).

That may seem like you’re taking the easy road and settling for slower growth, but you’re not – because, just as your experience suggests, index funds tend to outperform most other mutual funds. Indeed, over the past 15 years (as of the middle of 2019), a whopping 90% of large-cap stock funds underperformed the S&P 500.

Investing in individual stocks can be more exciting: When they’re rising, they will often soar faster than funds do, and it can be fun to cheer on the companies in which you’ve invested. But as you noted, even Warren Buffett has recommended index funds for most investors.

And remember – even if you have most of your long-term dollars in one or more index funds, you can always invest in some individual stocks, too – for fun and perhaps a chance at great gains. Over long periods, it’s hard to beat the stock market.

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